North Carolina Business Court Limits Unfair and Deceptive Trade Practice Claims Concerning Internal Corporate Matters

On January 28, 2014, the North Carolina Business Court dismissed an unfair and deceptive trade practice claim alleging that corporate directors structured the sale of a corporation in a manner that shortchanged its common shareholders in favor of its preferred shareholders. 

In Powell v. Dunn, a group of shareholders who held common stock in a corporation brought breach of fiduciary duty and unfair and deceptive trade practice claims against certain former directors who held preferred stock in the corporation. The plaintiffs alleged that in selling the corporation, the former directors manipulated the acquisition process and structured the resulting merger to benefit preferred shareholders, including themselves, at the expense of common shareholders. The complaint also alleged that the directors made misrepresentations and omissions related to the acquisition.  

Judge Gale held that even if the plaintiffs’ allegations were true, they were insufficient to state a claim for unfair and deceptive trade practices. The conduct alleged was not “in or affecting commerce,” which is required for any unfair and deceptive trade practice claim, but rather concerned relationships within a single corporate entity. Relying on prior North Carolina Supreme Court cases, the court explained that “when the unfair or deceptive conduct alleged only affects relationships within a single business or market participant, and not dealings with other market participants, that conduct is not ‘in or affecting conduct’ within the meaning of Section 75-1.1, even if other market participants may be indirectly involved in the unfair or deceptive acts.” Applying these principles, the court also concluded that indirect involvement in the acquisition by other market participants, including an investment bank and another potential acquirer, was insufficient to meet the “in or affecting commerce” requirement. 

The Business Court did not address the viability of the shareholders’ claim for breach of fiduciary duty. As reported in a recent client alert, the Delaware Court of Chancery recently issued a lengthy opinion addressing whether a company’s directors breached their fiduciary duties by favoring preferred shareholders over common shareholders. It remains to be seen how the North Carolina courts will address such claims. 

Claims for unfair and deceptive trade practices are appealing to plaintiffs because, if successful, the plaintiffs are entitled to triple damages plus recovery of their attorneys’ fees. Judge Gale’s decision indicates that such claims are generally not available in the context of a merger challenge (or other intra-corporate dispute). The decision in Powell v. Dunn, 2014 NCBC 3, is available here.